On July 29, 2019, the Delaware Court of Chancery dismissed an action against the directors of J.C. Penney Company, Inc. alleging failure of oversight because of the plaintiff’s failure to make a demand on the board before filing the derivative action.[1]  In doing so, the Court addressed whether the directors faced a substantial likelihood of personal liability with respect to the oversight claims that would excuse demand, and found that the plaintiff had not pled sufficient facts to indicate that the directors violated their Caremark oversight responsibilities.

The case arose because of claims against J.C. Penney for alleged failure to abide by the terms of a settlement to implement improvements to its price comparison advertising practices that were claimed to be deceptive.  The plaintiff’s claim in this case was that the board failed to oversee the company’s compliance with its undertakings.

The Court of Chancery acknowledged that a Caremark claim of failure to monitor corporate affairs is “possibly the most difficult theory in corporation law” for a plaintiff to win on.[2]  It then found, citing Stone v. Ritter,[3] that the plaintiff failed to allege facts to show that “the directors utterly failed to implement any reporting or information systems or controls” or, in the words of the recent Delaware Supreme Court decision in Marchand v. Barnhill,[4] that the board made no good faith effort to try to put in place a reasonable board-level system of monitoring and reporting.  The Court referred, among other things, to board and audit committee minutes to indicate the board’s involvement with legal and compliance matters, and in particular the pricing compliance situation.  The Court further found that the plaintiff failed to identify any red flags of ongoing violations of law to put the board on notice as a basis for a Caremark claim.

The J.C. Penney decision, coming down so soon after the Supreme Court’s Marchand decision, should  help to put the Marchand decision in context as being based on unique facts.  Nevertheless, the J.C. Penney decision underscores the importance of boards paying attention to their responsibilities for overseeing legal compliance and management of important operational risks and of documenting their efforts to do so.

[1] Rojas v. Ellison, C.A. No. 2018-0755-AGB (July 29, 2019).

[2] In re Caremark Int’l Inc. Deriv. Litig., 698 A. 2d 959 (Del. Ch. 1998).

[3] 911 A. 2d 362 (Del. 2006).

[4] 2019 WL 2509617 (Del. June 18, 2019).